Several Factors Are Ringing Alarms For Insurance Providers
A combination of economic factors, more expansive fields of membership and the increasing sophistication of products and services credit unions offer are creating some disturbing insurance trends as well as some new opportunities, according to several insurance experts.
"The average amount of claims [filed by credit unions on their auto loan portfolio protection] has increased significantly," said SWBC's Brad Young. "We're seeing an increase in claims severity, or the average amount of our payout. In cases where members hide the collateral, which is called secretion, or where they take off with the collateral, which is called embezzlement, we've seen that increase by 100% over the last 12 months."
The reasons behind these trends: higher auto prices, credit unions being forced to make loans with higher loan-to-value ratios in order to compete with the captive finance companies and other lenders, and rising delinquencies.
Moreover, the deterioration of the vehicle resale market, in part due to a flood of used autos from lease programs, also makes it tougher for a credit union to get its money out of the collateral even when it does manage to repossess the car.
"At first glance, these may seem obvious, but in the long run, we don't see those trends changing soon," Young suggested. "They are driven by the economy and the market."
As a result, SWBC is advising its clients to bone up on its collections policies and procedures.
"We have implemented programs to work more closely with our clients to help them mitigate skips and manage defaults," he offered. "The amount of damage to a repo vehicle increased by 48%, and the frequency [of loans going bad] has increased by 20% over 12 months. Does that alarm us as an insurance company, certainly. That's why we've partnered with three national firms, essentially professional skip-tracers. Skip tracing is a dying art, and it can't be done from behind a desk. It's a lot of knocking on doors and talking to neighbors. And the longer you wait to get started, the less likely you are to find the car and the more likely the car is to be in poor condition if you do find it."
Depending on a credit union's home state, it has a certain number of days in which to search for the vehicle. Typically, a credit union will attempt to locate the collateral and only after it has failed to do so does it call SWBC to file a skip loss claim.
"We want them to make us their first phone call," he noted. "We will search for the collateral on your behalf, and our recovery rates are significantly higher when we're involved at the start of the process instead of the end-anywhere from 60% to 85% higher."
The benefit to SWBC is obvious: if the collateral is found no skip-loss claim is filed. But he said credit unions benefit, too, by keeping their insurance rates down and potentially getting more value out of the collateral than what would have been gotten from filing a claim.
But it's not just auto loans. Take credit cards, for example, which have also seen an increase in delinquency. "With credit cards, credit unions aren't usually providing protection on those, so that's something they can look at. Traditional credit life and disability isn't always as attractive on credit cards because of the cost, so they might want to look at debt cancellation instead," advised Janet Randall of CUNA Mutual Group. "Credit unions have a need to increase their lending volume but also their non-interest income, so debt cancellation is becoming quite popular as an alternative to drive different income into the credit union."
Home equity lending is another product for which credit unions traditionally haven't offered much in the way of protection, usually because of the cost, she noted. "The cost to the member becomes a lot higher because the loans are much bigger, but the transitional benefits from debt cancellation can bring the cost down greatly," Randall offered. "It allows you to help the member just for the time when they need the most help, instead of blanket coverage."
Member business lending is a huge growth opportunity for credit unions, but it presents unique challenges, as well. "The key is understanding how different it is from consumer lending. It requires a different discipline, different forms and differing levels of expertise," said CUNA Mutual Group's Marc Krasnick. "We have had some very significant losses already for some credit unions. Because the average loan is larger, the time frame for major problems to develop can be a lot shorter. It requires a different mindset."
The same goes for indirect lending. "We have had some losses in the seven-figure category," he related. "Along with the increased opportunity come increased risks. We are pushing education and risk management to minimize that risk."
Among The Issues & Advice:
* CUs typically see a dramatic increase in loans, which is supposed to be a good thing, but it can overwhelm the staff. "They can go from processing handfuls of applications to hundreds overnight," Krasnick commented. "Loan officers start rushing to make decisions and then don't follow all the guidelines.
* Dealers must be carefully monitored to ensure they're sending valid, verifiable and complete information.
* CUs-or their indirect lending providers-should have agreements signed with every participating dealership.
* Beef up the collections department. "It takes a few months for delinquencies to occur, and then suddenly a bunch will all go delinquent, but the credit unions hasn't increased its collections capacity," Krasnick related. "You have to be ready for that initial rush."
And as credit unions continue to expand their FOMs and reach out to more members, they need to be ready to deal with an old problem: fraudulent deposits and forgeries. "They just don't know their members as well as they used to," he counseled.
"About 40% of losses occur in accounts that were opened in just the past six months. Frontline staff have to be trained to identify fraudulent items, and credit unions will have to consider stronger measures, including check-holds, which we know credit unions don't like to use because they want to be convenient. We don't tell credit unions what they can or cannot do, but we will point out the implications of those decisions."